“Zombie Stock” pharmaceutical play, Isis Pharmaceuticals (ISIS:NASDAQ), grabbed my attention the other day.

Although there have been plenty of bumps and bruises along this volatile ride, signs indicate that patient investors are aligned to reap big rewards. Let me explain.

In the chart above you will notice large moves in each direction. I call these plays “Zombie Stocks” because once the price begins to retreat many investors sell out, become bored, and leave them for dead. Once I spot oversold levels using the indicators I am about to mention, I jump all over them and reap big gains. This is because I know how to detect insider buying activity and get in before the flock of sheep joins the party. That’s when the stock previously thought to be dead suddenly awakens and quickly strides to new heights before your average investor has a chance to put the pieces of this mystery back together again.

It’s true that shares of this company trade in a violent nature. But I would argue that the signals were there in pointing investors to specific buy and sell points all along. Imagine buying predictable stocks like these that I come across all the time.

You could make a killing.
 
The first signal can be found in specific support and resistance regions. Specifically, I am referring to the breakout in February of 2006 in which the stock climbed from $5.50 to $9. On the pullback from $9, investors took note that this would be the newly defined resistance level and began dumping shares to hold on to their gains. Finally, the selling ceased when buyers jumped all over the support in early July of 2006.

This is where the Moving Average Convergence Divergence (MACD) indicator shown below the price came to be a factor. In the region I have highlighted in black you can see that the plotted moving average fell to the bottom of the range, indicating an oversold situation. Then the short-term line plotted in black surged above the longer-term one in red to signal that now was the exact time to buy back in.

And the stock soared.

It was off to the races as the stock climbed back to $9 per share. After a brief flag pattern on the candlestick charts, investors had the feeling that this pause was occurring for a reason. Sure enough, there would soon be another breakout. This time, shares would lift and touch $14. Now that $14 had become the new resistance, $9 became the new support.

The MACD quickly crossed in the early stages of a pullback in mid-January of 2007. In most cases it is absolutely necessary for a stock to test support and this was no exception to the rule. The bulls needed to know that the breakout from $9 was for real.

This brings us to the current state. Isis has successfully tested support thanks to another oversold MACD indication and is ready for a huge run. Look for the run to continue with a pause near $14. Once this hurdle has been cleared you could easily see shares reach $20. 

Also, following the breakout, look for a big volume day near the end of the newly formed uptrend. This is typically a warning that the bulls have become overextended and may soon take profits. 

Good investing,

Stephen Oakes
Editor, Volume Spike Alert

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